Alaska Pipeline: Politics May Make or Break The Deal

When natural gas prices were sky high a year ago, the "window looked wide open" for the long awaited Alaska natural gas pipe, which would carry supplies from the North Slope to the Lower 48. Months later, however, the announcements from producers are practically nil and President Bush's energy policy proposal to open up more areas for drilling is barely moving. The abundant North Slope natural gas remains frozen, in more ways than one, and whether it will actually move through a pipe at some point in this decade remain questionable.

In the next two weeks, however, some answers may be forthcoming, as an Alaska State Legislature committee holds a two-day hearing this week to get an update from many of the stakeholders. Another briefing July 25 also is expected to renew attention on what continues to be but a pipe dream.

Realistically, the Alaska natural gas pipeline has "never been a slam dunk," said Ed Small last week. Small, an analyst with Cambridge Energy Research Associates (CERA) based in Canada, is scheduled to speak to the Alaska State Legislature's Joint Committee on Natural Gas Pipelines this week, and has been actively involved in reviewing the various proposals involving the pipeline.

With everything at stake for so many, Small said that instead of the problems becoming smaller, it appears to him that they have instead only grown in the past few months, as more political forces attempt to bend the proposals into various shapes. As much as lowered gas prices are a factor, Small said it may be political issues that make or break the gas pipeline. Besides the political climate, which pits Alaska's elected leaders against Alberta's -- where the pipe would be laid under one proposal, Small also sees a two-fold problem on the supply side.

"On the demand side, when high prices showed, demand went down, and probably will not come back like it did before," he said. "The economy slowing down has helped in the perception of weakness and demand softness." Of the predictions that the North American gas demand will reach 30 Tcf in the next 20 years, Small said that CERA analysts had "never been a proponent of a 30 Tcf world, and now it's less plausible than probable." That in itself will lower expectations of an Alaska pipeline, he said.

The Alaska State Legislature's Joint Committee on Natural Gas Pipelines has scheduled public hearings July 17-18 in Anchorage on the current status of the gas pipelines that would carry the state's abundant energy source to Canada and the Lower 48. Testimony is expected from all of the movers and shakers in the various projects, as the committee attempts to piece together the splintered groups' long-term plans to move gas south by the end of the decade.

Updates from federal and state government officials are scheduled on construction plans, with representatives from the Federal Energy Regulatory Commission and the Regulatory Commission of Alaska testifying. Then over both days, the hearings will get down to the real deal, the producers' side of the business, with Phillips Alaska, BP Exploration and Yukon Pacific Corp. meeting with the committee, followed by representatives from Foothills Pipe Line and Williams Energy Services. The hearings also leave room for testimony from other stakeholder groups, but all eyes will be on the producers and marketers that will actually make one of the various projects viable.

FERC and Alaska officials are expected to offer an overview of the timing and process of applications in the works and how access to the pipeline by gas producers will be determined. Small will update officials about market conditions, offering the latest insight after CERA was retained by the State of Alaska to advise officials about gas market conditions.

Of special interest to producer groups will be the update over the course of the two-day hearings on the right-of-way pipeline applications. Yukon Pacific has a conditional right-of-way for a pipeline route from the North Slope to a proposed Valdez, AK liquefied natural gas (LNG) gasification plant. Foothills has renewed its right to file an application for a natural gas pipeline from the North Slope to a connection to its Alberta line to the Lower 48. And the Alaska Gas Producers Pipeline Team, which includes the energy heavyweights BP, Phillips Alaska and Exxon Mobil, has begun pre-application work on alternative routes.

But the Alaska State Legislature isn't the only group attempting to move the massive project along. On July 25, the Interstate Natural Gas Association of America (INGAA) will brief the media on a new study on future natural gas supplies from Alaska and the Canadian frontier. Jim Harrington of the Houston Energy Group, which prepared the report, will provide the briefing in Washington, DC.

What the coming hearings and briefing will focus a great deal of attention on, said Small, is actually laying the pipe. Small pointed to the infrastructure it will take, which he said will require no stopping once it really begins. "If you overlay the reality of the world, to bring the kind of supply to make it worthwhile from Alaska would require a huge infrastructure, which I don't see happening by 2007. Maybe 2010, or maybe 2015, but it's just so huge."

The second part of the dilemma facing an Alaskan pipeline is the incredible growth in the liquefied natural gas market, which has seen an enormous amount of activity from both majors and independents since the beginning of this year (see related story).

"LNG is going to be competition to Alaskan gas," Small said. "The demand problem has brought out a lot of potential responses, and LNG is one of them. It has changed the landscape, and so it changes the outlook for the pipe." While he said that the economics are actually comparable from Arctic gas and new greenfield LNG facilities, "LNG can be different on a scale regarding the cost and it has more of an environmental footprint than a 3,500-mile gas pipeline."

However, not all of the LNG announcements made thus far will be completed, Small noted. "As projects are announced, it's what's going to be built that puts the actual question into Arctic gas."

Despite what he called his "realistic" rather than "negative" attitude toward the pipe, Small said that laying it will be such a "monumental undertaking that it may develop a life of its own regardless. The need for gas may be more than adequate to overcome any obstacles." However, he cautioned that the obstacles were only getting higher.

"Alaska has drawn a line in the sand, and without getting into the legality of that, what that does is set the tone," Small said of the Alaska legislature and Gov. Tony Knowles moving to ensure the pipe is built the way the state wants it built, regardless. Knowles actually has been pushing for two natural gas pipelines to ensure Alaskan jobs. He wants one following the route of the Alaska-Canada Highway, known as the Alcan, and the other to transport gas reserves from Canada's Mackenzie Delta. Meanwhile, Alberta officials, worried that once one pipeline was built it would lose out on a pipe to deliver its Mackenzie Delta supplies, also has sort of drawn a line in the sand, Small said, which is important, because at least one-third of the pipeline would move through the province.

"From the sheer cost of it, it doesn't need any obstacles," he said. "Those kinds of things are stumbling blocks." Besides the government officials working to ensure they not upset constituents, Small said there also are the rights-of-way that have to be obtained and a lot of other work to be done behind the scenes.

"At this juncture, it's in the producers hands, and they say they will make a decision by the end of the year, but I'm skeptical of that," he said. "It doesn't mean it won't be built. But if (the producers' route decision) is contrary to the Alaskan government, it may be a fatal flaw in the entire process."

The key, he said, is in the economies of scale. "The bigger they make it, the more impact it will have on the market. A huge pipeline would have a huge impact on the market." In his opinion, the total pipeline's capacity, which includes Alaska, the Mackenzie Delta supplies and any LNG facilities built, would be a "maximum of 4 Bcf/d."

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